Whether or not the IRS can collect after bankruptcy depends in large part on the circumstances, as well as the category of taxes owed. In general, a corporate officer or director will not be held personally responsible for corporate income taxes. However, the IRS is likely to pursue collection of past-due employee taxes from a company’s officers, directors, and stockholders, even after bankruptcy.
Employee taxes (those most likely to make you vulnerable after bankruptcy) fall into three categories:
- Federal income tax withholding for employees
- Social Security and Medicare taxes (payouts under the Federal Insurance Contributions Act, or FICA)
- Federal unemployment tax
The procedure of collecting taxes after bankruptcy is justified by the “Trust Fund Recovery Penalty” provision of the Internal Revenue Code. The IRS defines personal liability broadly; those identified as responsible can include employees, shareholders, sureties, lenders, and others outside of the formal corporate organization. Anyone in a position to effectively control the company’s finances, or determine which bills should or should not be paid, may be vulnerable.
If you think you might be held financially responsible for company tax debt, you first need to determine your potential personal liability. If you are a sole proprietor, you can file for either Chapter 13 or Chapter 7 bankruptcy. Either type of bankruptcy can be used for personal debts or business debts, but will not eliminate tax debt. How this debt is collected, and how the IRS goes about collecting it, will depend on how your business is organized, and whether or not you personally guaranteed repayment of these amounts.
Many businesses incorporate partly to avoid personal liability, but when taxes are involved it’s a different story. If you are a corporate shareholder, LLC owner, or partner in a partnership, and you have signed personal guarantees or pledged collateral for business loans, putting your business through bankruptcy will not only not protect your business assets, it may not even protect your personal property. If you have placed your personal property at risk, you must file for bankruptcy for yourself and your business separately. Only personal bankruptcy will protect your personal assets, should you be determined responsible for payment. Other less extreme options include:
- Borrowing the money you owe from a bank or credit union.
- Asking for an extension on your payment deadline. If this is your first request, it’s likely you can get a 30- to 60-day reprieve.
- Paying in installments, using IRS Form 9465 (Installment Agreement Request). You may be given up to three years to pay up, and will be charged an interest rate of 8 percent per year and penalties of 0.25 percent per month.
- Making an “offer of compromise” for less than the amount owed. You do not have a legal right to get your tax bill reduced by the IRS, and it is entirely at their discretion, but you may be able to negotiate an enormous discount. The IRS has been known to accept as little as 1 percent of the amount owed and call it even. Although less than half of these offers end up being accepted by the IRS, you have the right to take a rejected offer of compromise to the IRS Appeals Office.
- Doing nothing and allowing the IRS to take some of your personal assets. They usually do not go so far as to take your primary residence.
The IRS has a wide reach and employs incredible resourcefulness when it comes to collecting back taxes. For this reason, it is always prudent to figure out a system for paying business taxes on a regular basis, and keeping in touch with the IRS if you fear your company is falling behind. They won’t forget about you, and — just as with individual taxes — ignoring a business tax problem won’t make it go away.